NEW YORK (CNN/Money) - I'm a 25-year-old college grad who's built up some savings by living at home for a couple of years and then renting cheap. I started a Roth IRA three years ago and have contributed the max every year, but all my money sits in a money market account that earns a measly 2.1 percent.

Do you think I should continue investing or would it make more sense to pay off my student loans? If I do invest, what sort of investments should I consider?

-- Dan Ellsworth, Kansas City, Missouri

I don't see this as an "either-or" scenario -- that is, you should channel your money to paying off your student loans or you should direct it toward saving and investing.

I see it more of a "do this and that" situation: invest in a Roth IRA (and in accounts other than a Roth, for that matter) at the same time you're paying off your student loans.

There are several reasons I take this "inclusive" rather than "exclusive" approach. First of all, I think it's important that one get into the habit of saving and investing early on in life, that one give the same priority to coming up with cash for investing the same priority as paying other expenses.

Saving and investing is something that should be done on a regular basis, not just receiving a after a windfall of some sort or at times when you fell particularly flush.

Fact is, there are probably going to be many times throughout your life when you'll be taking on debt to acquire an asset you probably couldn't otherwise afford -- the example of taking out a mortgage to buy a house immediately jumps to mind. So if we saved and invested only after paying off the various debts we may have, many of us would never get around to saving and investing at all, which would be a shame.

Another reason I don't think it's a good idea to wait until you're debt free before you begin saving and investing is that I believe it's important to maintain a savings cushion you can fall back on in case of an emergency -- unexpected expenses, a layoff, whatever.

If you devote all your cash to debt repayment and don't have any savings to fall back on, it could be difficult to weather hard financial times.

None of this is to say that repaying debt isn't important. It is. But we also need to maintain some financial flexibility, and focusing on debt repayment to the exclusion of saving and investing can reduce our financial options, which could come back to haunt us financially.

All that said, I also think it's smart that we manage our debt sensibly. So, for example, if someone is loaded up with credit-card debt that's racking up interest at a rate of 18 percent or more, it makes sense to do whatever you can to lower that expense.

That might include transferring your balances to a card with a lower interest rate or, if the option is available, perhaps taking out a home equity line of credit, which not only would lower the interest rate but make the interest tax-deductible as well.

Of course, since you're dealing with a student loan, I suspect you're probably already dealing with a relatively low rate of interest that is also tax-deductible. For details on whether interest on a student loan is deductible, check out "IRS Publication 970: Tax Benefits for Education".

By assuring that you're getting the lowest rate possible, less of your money is going to debt repayment, which leaves more for other things, including saving and investing.

Okay, so assuming you're going to continue repaying your student loans and throw as much money as possible into investments, what kind of investments should you be considering?

The first thing I suggest is that you try to build an emergency fund equal to about three months' worth of living expenses. This money should be invested in an investment that has virtually no risk to principal -- something like a money market fund or perhaps even a savings account.

Yes, that means paltry returns at the moment, but the main issue here is having a sum of money that you know will be there should you need to tap it. To find the most competitive returns on money funds, you can check out the iMoneyNet site and for the best yields on CDs, savings accounts and bank money-market accounts, you can go to our Rate Watch section.

Aside from the money in your emergency stash, however, I think a youngster like yourself should be thinking long-term growth. Which is to say you shouldn't be hanging out in money-market funds and the like, but going for higher long-term returns in stock funds.

There's no doubt that means the value of your account is going to gyrate up and down a bit. You might even go through periods such as we've seen the past few years where your account loses 20 percent or more of its value.

Over the long-run, however, stocks have generated much higher returns than all other financial assets. And someone your age should be more concerned about making your portfolio's value grow over the long term and not so worried about short-term fluctuations along the way.

Nonetheless, since I'm a prudent sort of guy, I believe that even young investors should include a small dollop of bond funds in their portfolio, just to hedge against the risk that stocks don't reprise their glorious history and just to dampen the volatility in your portfolio a bit.

For more on just how you ought to divvy up your investments, as well as for some suggestions on the type of funds you might consider buying, check out our Asset Allocation tool and our Fund Screener.

One final note. Ideally, I think your emergency stash should be held in a regular old taxable account as opposed to an IRA or other tax-advantaged account. That way you can tap it whenever necessary without having to worry about early withdrawal penalties.

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Since you're talking about investing in a Roth IRA account, however, you do have some flexibility for withdrawals since you can always pull out an amount equal to your original contributions without paying tax or incurring a penalty. So, initially at least, I suppose it's okay to build your emergency fund within your Roth IRA.

Eventually, though, I think you should create an emergency fund outside your Roth IRA so that you can reserve the space within your Roth for investments that can produce bigger long-term gains, which allows you to take better advantage of the tax-free compounding that makes a Roth IRA so attractive.

Walter Updegrave is a senior editor at MONEY Magazine and is the author of "We're Not in Kansas Anymore: Strategies for Retiring Rich in a Totally Changed World."